The new Covid-19 small business contingency plan signed by President Trump this week doesn’t fix any flaws in the original stimulus legislation that allowed companies with an eventful history to receive billions of dollars in payments.
The $ 900 billion pandemic relief bill includes an additional $ 284 billion for the Paycheck Protection Program to support small businesses. With the earlier stimulus, 5.2 million small businesses borrowed $ 525 billion in loan forgiveness.
According to a Wall Street Journal analysis of loan recipients and news sources, nearly 1,500 companies that have received approximately $ 2 billion in PPP loans have been accused of violating government rules or criminal behavior.
Another 432 companies have laid off employees after being approved for nearly $ 1 billion in loans, according to an analysis of national layoff notices filed primarily by large companies by Good Jobs First, a Washington, D.C., nonprofit that accounts for companies and governments.
The government has sued dozens of people in at least 36 complaints related to fraudulently obtaining funds for coronavirus relief, many for allegedly falsifying PPP loan applications and embezzling the funds, according to a review of the Journal of Justice Department data.
The original PPP program skipped the typical lender’s due diligence to speed money to the struggling business. Issues such as regulatory violations would likely have come to light under typical loans. The requirements can change when the Small Business Administration sets the application process and rules for the new money. Investigators have just begun to untangle the questionable loans and reports of potential fraud from the first round of PPP.
“Prevention is always better than detection,” said Bruce Dorris, chief executive of the Association of Certified Fraud Examiners. “There will be tens of billions of dollars in fraud that we will find in the first round of funding.”
The latest round of PPP funding allows loans of up to $ 2 million to companies with fewer than 300 employees, instead of $ 10 million for employers with no more than 500 employees in the first round. Businesses must also demonstrate a sales decline of at least 25% between comparable quarters in 2019 and 2020 to be eligible for the new program.
This time, Congress focused more on helping businesses than keeping jobs by allowing borrowers to spend the money on a wider range of non-wage costs.
The new legislation does not address how the government monitors revenue declines or whether businesses facing lawsuits or violating government regulations should be eligible. The bill gives the SBA 10 days to implement the changes.
Analysts say as many as four million small businesses could be lost by 2020 as the pandemic takes its toll on local economies. WSJ visits Yuma, Arizona, where small business owners say another round of congressional stimulus may be too little too late. Photo: Adam Younker for The Wall Street Journal
“You don’t get a mortgage until you can prove that you earn a certain amount,” said Ann Gittleman, general manager at Duff & Phelps, a multinational financial consultancy. “I would have assumed that more documentation would have been needed during this relaunch.”
An SBA spokeswoman said the agency was quick to update the rules for PPP borrowers and lenders.
The Journal’s analysis is based on data from all 5.2 million PPP recipients released in response to a lawsuit filed by news organizations including Journal publisher Dow Jones & Co. The Journal has matched names in its PPP database with news stories published since 2012 detailing lawsuits and allegations of government violation from news sources. Agreements were confirmed by comparing the address on their loan to company disclosed locations mentioned in news articles.
The data includes previously unreleased details of 4.5 million recipients who have borrowed less than $ 150,000. These smaller borrowers accounted for 28% of the $ 525 billion distributed between April and August.
The nearly 1,500 companies with difficult backgrounds received loans averaging $ 526,000 to support an average of 36 jobs. Nearly 400 of those companies have borrowed at least $ 1.5 million, including a televangelist who has been warned by authorities for allegedly promoting false coronavirus treatments and a private equity firm accused by investors and a government bond regulator of running a Ponzi scheme, Journal finds.
Many of the loan recipients were charged with more typical business offenses.
PPP’s Role in Covid Aid
Rhode Island-based Madeira Restaurant Inc. received a $ 143,000 PPP loan in April. The U.S. Labor Department filed a lawsuit against the restaurant in 2019, accusing it of violating the Fair Labor Standards Act by withholding overtime from employees who worked more than 40 hours a week. A court ordered the restaurant in May to pay workers $ 40,000 in back wages and damages.
Restaurant employees named in the complaint declined to comment or could not be reached.
The SBA said in November it would monitor companies that have received loans of $ 2 million or more. The new legislation also enlarges the SBA’s supervisory authority and frees up an additional $ 50 million for future audits. The new bill prohibits publicly traded companies from participating and requires disclosure of some government officials who have received loans, but does not include documentation requirements for borrowers.
The SBA is working with detectives to recover money from obvious fraud, but loans that are borderline inappropriate will require other remedies such as fines, said Tarek Helou, a former prosecutor who is now a partner at Wilson Sonsini Goodrich & Rosati.
“Someone who lies about owning a business and buys a Lamborghini is clearly a criminal,” said Mr Helou. ‘Someone who is not sure what will happen to his company in a week or two because they are given various sources of information about their earnings … Should that person go to prison? I do not think so. “
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Porch.com, which got a $ 8 million PPP loan in April, illustrates three different gray areas of the law. The home services and moving company software vendor is being sued for alleged violation of federal call-no-call rules, according to court records.
The company’s founder and CEO, Matt Ehrlichman, said Porch.com is contesting the lawsuit and the text messaging system in question was no longer in use.
Porch.com also benefited from the housing boom this year, with projected revenues of $ 120 million next year, up from $ 36 million in 2018, according to a July press release.
When the company applied for the loan, the situation was very different. Transaction volumes “fell off a cliff as the pandemic hit” and layoffs were a possibility without the loan, Mr. Ehrlichman said.
The company recovered to a merger with a blank check investment company that closed on Christmas Eve. The deal gave Porch.com $ 323 million in new capital and a Nasdaq stock listing.
“I would like to give credit to the government and make an appeal,” said Mr. Ehrlichman. “I think Porch is a great example of the purpose of that whole program.” He wouldn’t say whether the company would return the PPP money.
Write to Shane Shifflett at [email protected]
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